Tuesday, January 12, 2010

1. Some asset classes are clearly entering into a bubble, as highlighted by The Economist in this week's cover story. This would include Chinese, Argentine and Brazilian stock markets, among other emerging markets.

2. I agree that some pharmaceutical stocks are undervalued, including Pfizer.

3. In contrast, some tech stocks are clearly overvalued, including Amazon, Apple and Google. I do like Microsoft, IBM and Oracle, as Mr. Burton does.

4. I always recommend "plain vanilla" index funds, such as those tracking the S&P 500.

5. Although oil prices have been rising in response to the cold front in most of the Northern hemisphere, this is probably not sustainable. Other indicators suggest that - the current freezing temperatures notwithstanding - 2010 should be the hottest year on record.

6. I do have to disagree with the "bullish sentiments" on the U.S. dollar. The sky-high deficits do not bode well for the greenback, and already it has fallen back compared to the euro and the yen.

7. I completely disagree with the advise on emerging market index funds (such as iShares MSCI Emerging Markets, EEM). This encapsulates the bubble in emerging market stocks, and will clearly collapse in the coming months. Currently, EEM is trading near its 52-week high of 43.47, and it should come down to at least 35 within the next 6 months.

The main problem with the note is that it does not factor in a very likely rise in inflation and interest rates (except in the recommendation to avoid long-term government bonds). Alternative investments, as mentioned before on this blog, are gold and other commodity ETFs, as well as TIPS (Treasury Inflation-Protected Securities), and some staple goods ETFs.

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Twitter: @Luis_Fierro_Eco
Economist specialized in Economics, Finance, Climate Change, Climate Finance and Development. 28 years of experience as economics and business analyst, researcher and practitioner.
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